Are you interested in investing but not sure what all of the jargon means? In part one of this series, I introduce and explain some of the most common investment lingo.
You have most likely heard of a hedge fund, but perhaps you did not ever really understand what it was. A hedge fund serves as a private entity which used to almost always be a limited partnership. More commonly, a limited liability company as the latter has evolved to become the standard due to its extreme flexibility. Due to government regulations meant to protect inexperienced investors, investing in hedge funds can be difficult for even the most ordinary investors.
In layman’s terms, a mutual fund is a pile of money that comes from an assortment of investors (like yourself) and is then invested in assets like stocks and bonds. A mutual fund may hold hundreds of stocks, with the purpose of spreading the risk. One of the benefits of mutual funds is the ability to pool your money together with whoever you choose. In most cases, money managers make buy and sell decisions for mutual funds, which brings us to our next definition.
Capital Gain (or loss)
Investor Junkie explains a capital gain or loss as the difference between what you bought an investment for and what you sell if for. If you buy 100 shares of a stock at $10 a share (spending $1,000) and sell your shares later for $25 a share ($2,500), you have a capital gain of $1,500. A loss occurs when you sell for less than you paid. So, if you sell this stock for $5 instead ($500), you have a capital loss of $500).
One of the last investment terms you should know the p/e ratio. is The P/E Ratio is the measure that reflects how much you pay for each dollar that company earns. A company often reports profits on a per-share basis. So a company might say that it has earned $5 per share. If that same stock is selling for $75 a share on the market, you divide $75 by $5 to come up with a P/E ratio of 15. The higher a P/E ratio is, the more expectations for higher earnings.
Stay tuned for part two of this series, where I will explore even more investment terminology.